2012 Annual Report

Email this Page Share to linkedIn

To Our Members

In these times of uncertainty — economic, political, and regulatory — the role of the Federal Home Loan Bank of San Francisco and the other 11 Federal Home Loan Banks is as important as it has ever been. It is our job to support our member financial institutions in providing credit to families and businesses so that our neighborhoods and our nation can move towards greater prosperity and financial health. As our members look for ways to serve their communities, while maintaining and improving their profitability and capital strength, they rely on the Federal Home Loan Banks for the funding and risk management tools they need to achieve these objectives.

To fulfill this role, the Federal Home Loan Bank System itself must be financially strong and profitable. And it is. In 2012, the System’s net income was $2.6 billion, a 64% increase over the previous year. At December 31, 2012, the combined regulatory capital-to-assets ratio of the Federal Home Loan Banks was 6.69%. Total System advances increased 2% in 2012, to $425.8 billion at yearend.

Financial Performance

The Federal Home Loan Bank of San Francisco is doing its share to contribute to the strength and profitability of the Federal Home Loan Bank System. In 2012, our net income more than doubled relative to the prior year, to $491 million from $216 million in 2011. As a result of further stabilization of the housing and mortgage markets, as well as improved expectations for these markets, credit-related other-than-temporary impairment (OTTI) charges on our portfolio of private-label residential mortgage-backed securities (PLRMBS) in 2012 were substantially lower than in the prior year. These charges totaled $44 million in 2012, compared to $413 million in 2011.

As of December 31, 2012, our capital position was very strong. Our total regulatory capital- to-assets ratio was 12.44%, exceeding the 4.00% requirement. We had $10.8 billion in permanent capital, well in excess of our $4.1 billion risk-based capital requirement. Our total retained earnings were $2.2 billion, and the ratio of our estimated market value of capital to par value of capital stock was 119.3%.

Based on these results, in the fourth quarter of 2012 we began paying a higher dividend and repurchasing a greater amount of excess capital stock. The dividend rate for 2012 was 0.97%, compared to 0.29% for 2011. The amount of excess capital stock repurchased was $2.1 billion in 2012, compared to $1.8 billion in 2011.

Serving Our Members

Our members rely on access to the Bank’s competitively priced funding to help them reduce their borrowing costs, control interest rate risk and other financial risks, manage liquidity and contingent liquidity needs, and deliver the products and services their customers need. We see significant value in continuing to provide these services to our members.

Although the overall economy grew modestly and the long-depressed housing sector began to show clear signs of recovery in 2012, demand for Bank advances continued to decline during the year. Most members had ample liquidity, primarily in the form of retail deposits, while loan growth was limited. As a consequence, members and former members continued to pay down advances, resulting in yearend advances balances of $43.8 billion, compared to $68.2 billion at the end of 2011. In total, 116 institutions reduced their use of Bank advances during the year, while 59 members increased their advances borrowings.

The Bank’s resilience in the face of a shrinking balance sheet is a testament to its cooperative, self-capitalizing ownership structure. It is this structure that allowed us to expand our advances and capital base rapidly and significantly to meet the needs of our members during the liquidity crisis that began in 2008, and it is this structure that has allowed us to adapt to major changes in our operating environment, including the relatively low level of mortgage originations by our members and membership terminations by some of the Bank’s largest borrowers. This resilience is important to our members because, even when they are not actively borrowing from us, knowing that we will be here for them when they need us is critical to their own financial management strategies.

Community Impact

Providing a readily available, competitively priced source of funds to local community lenders is the basic business of the Bank and the primary way that the Bank serves communities. We help community lenders meet the credit needs of individuals, families, entrepreneurs, businesses large and small, and other organizations, in all phases of the economic cycle.

As of December 31, 2012, our members included 229 commercial banks, 105 credit unions, 17 savings institutions, 6 industrial loan companies, and 3 insurance companies. In 2012, we also welcomed our third community development financial institution, bringing the total number of members to 363.

During the year, our array of targeted community investment programs once again had a powerful, and often transformative, impact on low- and moderate-income families and communities served by the diverse members of our cooperative.

Through a competitive application process, the Bank awarded $33 million in Affordable Housing Program (AHP) grants to help create over 3,500 homes in Arizona, California, Nevada, and seven other states where our members operate. The 62 winning projects will not only produce safe, decent affordable housing, but will also create jobs, increase construction and consumer spending, and generate new tax revenues, creating a positive ripple effect in local economies. In a report titled “The Local Impact of Multifamily Construction in a Typical Metro Area,” the National Association of Home Builders estimates that the one-year impacts of building 100 multifamily rental apartments in a typical metro area include $7.9 million in local income, $827,000 in taxes and other revenues for local government, and 122 local jobs, with additional, ongoing impacts in subsequent years. Since the inception of the Affordable Housing Program in 1990, the Bank has awarded $690 million through the competitive AHP to support the creation of over 100,000 units of affordable housing.

In 2012, we also allocated $8 million to members through our AHP homeownership set-aside programs — the Workforce Initiative Subsidy for Homeownership (WISH) and Individual Development and Empowerment Account (IDEA) programs. These first-time homebuyer programs are designed to help low- and moderate-income families and individuals become homeowners by matching $3 for every $1 contributed by the homebuyer, up to a maximum grant of $15,000. Since the inception of these programs, the Bank has awarded $51 million to help approximately 4,000 families and individuals purchase their first home.

We provided $1 million in pre-development grants through our Access to Housing and Economic Assistance for Development (AHEAD) Program in 2012. Funded at the discretion of our Board of Directors, these grants help local community groups initiate projects or programs that will create or retain jobs, facilitate public or private infrastructure improvements, or produce housing, services, or other benefits for low- to moderate-income households.

Our members borrowed $376 million in Community Investment Program advances during the year to fund home mortgage and first-time homebuyer programs, create and maintain affordable housing, and support other community economic development activities. Members also borrowed $340 million in Advances for Community Enterprise (ACE) funding. Based on the ACE applications submitted by members, the Bank estimates that these advances, which are used primarily to support loans to small businesses and SBA-insured lending, will help create or retain approximately 1,585 jobs around the country. In addition, we issued $132 million in lower-cost standby letters of credit to credit-enhance tax-exempt financing for multifamily rental projects.

A Structural Advantage

Time and again the Federal Home Loan Bank System has demonstrated its resilience in all phases of the economic cycle, even in times of unprecedented stress and severe crisis, and proven beyond a doubt that it is a force for financial stability and economic recovery.

Since 1932, the FHLBank System has supported housing lenders in times of expansion and contraction, continually adapting to changing circumstances and needs. The System supported its members during the thrift crisis of the 1980s and helped pay for the costs of that crisis. In 2008, the System played a critically important role by providing immediate funding in response to a liquidity crisis that posed a real danger to the national and global financial systems.

Individual Federal Home Loan Banks, including the Federal Home Loan Bank of San Francisco, have been severely tested by the effects of the downturn in the housing and mortgage markets, including credit-related OTTI charges on PLRMBS and reduced demand for FHLBank advances. We will continue to face challenges in the years ahead as we respond to economic, political, regulatory, and structural changes in our operating environment. But we have continued to build our capital strength and improve profitability, as demonstrated by the financial performance of the FHLBank System and our own Bank in 2012. Most importantly, throughout the recession and the weak recovery we are still experiencing, the FHLBank System has continued to support housing finance, community development, and economic growth by providing its members with prompt, reliable access to low-cost funding, supplying them with essential liquidity and financial risk management tools to help them meet the credit needs of their customers and communities. The FHLBank System has continued to accomplish its fundamental mission as intended.

The formula for ensuring the FHLBank System’s stability, flexibility, and strength is based on several key attributes:

As we examine and hone our business model and strategies in light of housing finance reform proposals and the changing environment, we will work to ensure that the key structural attributes that have contributed to the success and resilience of the FHLBank System over the last 80 years are recognized and preserved. Our members and other stakeholders have shown great support for the Federal Home Loan Banks over the years, helping us explain why the effective functioning of the FHLBank System is so essential to them and to their communities. In the coming months and years, these efforts may become even more important as we work together to protect the ability of the FHLBank System to serve our members and their communities.

In Appreciation

The people who lead and staff the Bank are dedicated to achieving our housing and economic development mission with and through our members. We thank our Board of Directors, Affordable Housing Advisory Council, management, and employees for the commitment, insight, diligence, and ingenuity they bring to helping the Bank achieve its mission every day.

Above all, we thank you, our members, for your investment in the Bank and your use of our products and services to help you foster strong and vibrant communities. As always, we will strive to provide you with the financial tools you need to meet community credit needs and spur economic recovery and growth in the regions you serve.

John F. Luikart
Chairman of the Board
Douglas H. (Tad) Lowrey
Vice Chairman of the Board
Dean Schultz
President and Chief Executive Officer